The Number Of Jobs Lost To Trade With China Is Zero, Zip, Nada

One of the great shouting matches in the current election is over how the American working class has been stiffed by all this free trade stuff. The capitalists get to ship the jobs overseas, increase their profits and it's Joe Sixpack who gets the shaft. This is not actually the truth of course, but there are enough people who believe it to make it an important factor in said election. For the effect of trade on the number of jobs in an economy is zero.

Trade absolutely changes the jobs which are done, that's rather the point of it. That we get Johnny Foreigner to do what he's better at than we are and we do what we're better at than they are. Let the Chinese do the socks and we'll do the software sort of thing.

However, we do have that David Autor et al report on how jobs were lost to the China trade which is a bit of a problem for this flat insistence of mine. And to explain it, here's Alan Reynolds:

“The China Shock,” by David Autor, David Dorn and Gordon Hanson examined the effect of manufactured imports from one country (China) on local U.S. labor markets. That is interesting and useful as far as it goes. But a microeconomic model designed for local “commuting zones” cannot properly be extended to the entire national economy without employing a macroeconomic model.

Reynolds then goes on to show that the effect being registered is very much smaller than most seem to be assuming. All of which is entirely true. But it's still only going so far. Because what is really being measured here is the change in jobs that are being done in the US. We're not getting to the change in the total number of jobs in the US.

During the NAFTA debates I shared a podium with an experienced, highly regarded U.S. trade negotiator, a strong NAFTA suppporter. At one point a member of the audience asked me what I thought the effect of NAFTA would be on the number of jobs in the United States; when I replied "none", based on the standard arguments, the trade official exploded in anger: "It's remarks like that which explain why people hate economists!"

The standard argument being exactly that macroeconomic one which Reynolds refers to. Which is that the number of jobs in the US is determined by the level of aggregate demand in the US. That, in turn, is determined by the monetary policy of the Federal Reserve and the fiscal policy of Congress. And nothing more, there is no room in here for trade to make a difference.

No, even if we're running a trade deficit, that current account "loss" comes back as a surplus on the capital account because the balance of payments really does balance. There is no loss of that aggregate demand. Thus trade changes which jobs are done in the US - trade in socks will lead to socks being made in China, trade in software will lead to software being written in the US - which is exactly what has happened. But the effect of trade upon the number of jobs in the US is zero, zip, nada.

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. ...